Making no change (keeping price at dollar 60) Questions 6 through 10 refer to th
ID: 1218498 • Letter: M
Question
Making no change (keeping price at dollar 60) Questions 6 through 10 refer to the scenario that follows. A monopolistically competitive firm has the following short-run inverse demand, marginal revenue, and cost schedules for a particular product: P = dollar 45 - dollar 0.2Q MR = dollar 45 - dollar 0.4Q TC = dollar 500 + dollar 5Q MC = dollar 5 What quantity would maximize profits for this firm? At what price should this firm sell its product? What would be the amount of the firm's total revenue at the quantity and price identified in the prior two questions? What would be the amount of the firm's profit (positive number) or loss (negative number) at the quantity and price identified in questions 6 and 7? What do you think would happen in this market in the long run? New firms would enter. Some existing firms would leave. Some existing firms would stay but no new firms would enter. There is not enough information to make this determination.Explanation / Answer
6) For profit maximizing situation MR = MC
5 = 45 - 0.4Q
0.4Q = 40 so that Q = 100
Profit maximizing quantity is 100
7) P = 45 - 0.2Q
So putting Q = 100
P = 45 - 0.2 * 100 So that P = 25
8) Revenue = Price * Quantity
Putting P = 25 amd Q = 100
Revenue = 25 * 100
Revenue = 2500
8) Total Cost is given as
TC = 500 + 5Q
Putting Q = 100
TC = 500 + 5 * 100 = 1000
Profit = Revenue - Cost
Profit = 2500 - 1000 = 1500
10) Profit margin is quite high in this scenario. In such conditions there will mmore firms willing to enter in the market which will drive the competiton and there will be pressure on margin.
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